Question 06 (20 Points) Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company's profi ts have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,000,000 in manufacturing overhead cost and produce 16,000 units of the deluxe model and 125,000 units of the regular model. The deluxe model requires 1.75 hours of direct labor time per unit, and the regular model requires 1.0 hour. Material and labor costs per unit are as follows: Model Deluxe Regular Selling price 312 185 Direct Materials 154 112 Direct Labor 16 8 Required: 1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. Using this rate and other data from the problem, determine the unit product cost of each model. 2. Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools: Estimated Activity Cost Pool Activity Measures Overhead Costs Purchase Orders No of Purchase orders 252000 Scrap/rework Orders No of scrap/rework orders 648000 Product Testing Number of tests 1350000 Machine Related Machine - Hours 3750000 Total Overhead Cost 6000000 Activity Measures No Of Purchase orders No of scrap/rework orders Number of tests Machine - Hours Deluxe 400 500 6000 20000 Expected Activity Regular 800 400 9000 30000 Total 1200 900 15000 50000 Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools. 3. Using the predetermined overhead rates computed in part (2) above, do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. b. Compute the unit product cost of each model (materials, labor, and manufacturing overhead). 4. From the data you have developed in (1) through (3) above, identify factors that may account for the company's declining profits